Amazon’s Multibillion-Dollar Ad Business Propels Its Profitability

Yesterday (Thursday, April 26), Amazon released its Q1 2018 financial results. Amazon knocked it out of the park! In fact, Jim Cramer on CNBC called it “the best quarter I’ve ever seen from a company.”

I would argue that it’s the best quarter ever because of a little-known business Amazon has: advertising. In fact, Amazon has three platforms on which marketers — and not just marketers that sell products on Amazon — can buy advertising:

Amazon Marketing Services (AMS). This is the most widely used Amazon ad platform today. Marketers selling products on Amazon.com can buy search ads in AMS to increase their products’ visibility.

Amazon Media Group (AMG). This is Amazon’s managed service ad platform to buy banner ads on Amazon owned properties like Fire TV and Kindle.

Amazon Advertising Platform (AAP). This is Amazon’s demand-side platform that any marketer can use to buy display advertising programmatically on Amazon-owned properties and on properties across the web.

Now that you’re up to speed on Amazon’s ad platforms, let’s get into how those three platforms made a splash during Q1. Amazon does not specifically break out its advertising revenue, but we can assume that:

Amazon has a multibillion-dollar ad business. In its earnings report, Amazon has a line item under net sales called “Other,” which is mostly comprised of advertising revenue. In Q1 2018, Amazon pulled in over $2 billion in “Other” sales. This should come as no surprise: We’ve talked with numerous consumer goods marketers that are spending up to 30% of their search advertising budget on Amazon search ads.

Advertising is Amazon’s fastest-growing business. “Other” sales for Amazon grew a whopping 139% year over year, far exceeding the YoY growth of its eCommerce sales and AWS sales. This also aligns well with recent research we conducted, where we found that CPG companies, such as Bai Brands, increased their AMS spending by more than 50% YoY during the 2017 holiday season.

Advertising is helping drive Amazon’s profitability. In Q1, Amazon’s profit increased by 221% YoY in Q1 to $1.6 billion — not too shabby for a company that’s gotten flack in the past for being light on profit. But what’s helping drive profit for the eCommerce company that often loses money from the products it sells on its platform? Advertising. AWS has helped Amazon become a profitable company, but its advertising business will help it continue expanding profits.

This topic of Amazon’s advertising business is one that we are following closely and will be producing more research on in 2018. As always, if you have any thoughts or questions, please reach out.